WILMINGTON – While most Americans continue to use tried-and-true dollar bills to pay for goods and services, a growing number of institutions, investors and academics are studying whether that paper currency will become a thing of the past.
Cryptocurrency, or secure, traceable digital currency like the leading Bitcoin, has become a hot topic on Wall Street and among bankers worldwide. It’s an entirely intangible asset, meaning you won’t find stacks of “coins” stored away in a vault, but proponents argue that all countries now utilize intrinsic fiat currency. The United States was the last nation to drop all parts of the gold standard in the ‘70s.
Tangible or not, Bitcoin’s value has spiked from about $5,000 per coin a year ago to more than $55,000 as of March 10. Its total market value crossed $1 trillion for the first time this year. A March client survey by Goldman Sachs showed that 40% of respondents held cryptocurrency and nearly two-thirds of them expected to invest more in the next two years.
With those retail gains, more of corporate America is coming around to the idea, and even investing large sums of reserves in cryptocurrency. Electric automaker Tesla, led by top cryptocurrency proponent Elon Musk, bought $1.5 billion in bitcoin in February. Online payment service Square, led by another tech savant, Jack Dorsey, who is also CEO of Twitter, made a $220 million investment.
The first major company to invest in bitcoin was business-intelligence software company MicroStrategy – which actually got its start in Delaware serving DuPont before branching out and moving to Virginia in the ‘90s. Last summer, MicroStrategy announced a plan to invest heavily in bitcoin, and even issued debt to continue buying. To date, it has invested about $2.19 billion and become an outspoken proponent of cryptocurrency.
For all that growing retail and corporate acceptance though, many policy leaders and institutional investors remain skeptical.
Last month, Treasury Secretary Janet Yellen called Bitcoin a “highly speculative asset,” voicing concerns over its sometimes-illicit uses and large environmental impact to “mine” the currency – to limit the number of bitcoins in circulation, users have to complete complicated mathematical equations using computer server farms that consume a huge amount of power.
Most large hedge funds have not taken positions in cryptocurrency, worried about the seesawing values that can hit the market. Exchange-traded funds, or ETFs, that track stocks and commodities as a class are also currently prohibited from tracking cryptocurrencies under U.S. Securities and Exchange Commission regulations, limiting investment opportunities.
John Collins, founder of First State Fintech Lab, a nonprofit dedicated to nurturing the fintech ecosystem in Delaware, said that despite its increasing attention in financial media and its rising investments, he still sees cryptocurrency as a burgeoning niche product.
“One trillion dollars is certainly nothing to sneeze at, but it’s still pretty small when looking at a global asset class,” he said.
Collins has seen the industry grow from its earliest days. As a senior professional staffer for the U.S. Senate Committee on Homeland Security and Governmental Affairs under then-Chairman Tom Carper (D-Del.), Collins helped lead the first Congressional hearing on digital currencies in 2013. In leaving public service, he became the first head of policy at Coinbase, the world’s second-largest digital currency exchange by volume.
While individual retail investors have largely been responsible for driving up the value of cryptocurrencies to date, Collins said that the biggest hurdle to future growth is the acceptance by institutional investors like hedge funds that have more dollars in play.
“That’s really what’s going to move the market,” he said.
While investments by Tesla and Square grab the attention of Wall Street, Collins said the more interesting news in his opinion was investment bank BNY Mellon’s recent decision to begin holding custody of customers’ cryptocurrency assets.
Banks have long been wary of keeping such volatile assets on their books, even though the federal Office of the Comptroller of the Currency ruled last summer that they legally could.
“There’s probably no older old-school, white-shoe bank than BNY Mellon, and for them to make that decision even a few years ago would have been totally unexpected,” he said. “A lot of banks were totally shying away from even banking cryptocurrency companies, let alone holding cryptocurrency on their books themselves.”
Right for personal portfolios?
James Lee, a certified financial planner and futurist who founded the Wilmington-based wealth management firm StratFi and has been researching and writing about cryptocurrency since 2017, recommends that his clients invest a small part of their portfolio in the assets, typically 2% to 3%, simply because there is an enormous growth potential.
“If you go less than that, it doesn’t matter, and if you go more than that, then the tail starts wagging the dog. It’s just a tremendously volatile asset,” he said, noting Bitcoin lost 80% of its value in 2018. “You should only buy crypto with money that you’re willing to walk away from.”
Lee personally holds Ethereum, the second most-popular cryptocurrency behind Bitcoin, because he believes its underpinning technology has a brighter future.
“It does have a place in portfolios, one as a hedge against inflation and two as a hedge against the future, with technology change,” he said.
Not everyone is convinced though. New York University economics professor Nouriel Roubini has been one of cryptocurrencies’ biggest critics, warning Congress in 2018 that it was “the mother of all scams.”
His position hasn’t changed despite Bitcoin’s rapidly increasing valuation, writing in February that bitcoin was a bubble waiting to burst. Citing its lack of uses, reliance on overseas “mining” outfits, and concerns about system safety, Roubini decried Bitcoin’s value to investors.
“Risky, volatile bitcoin doesn’t belong in the portfolios of serious institutional investors. Many of its retail backers are suckers being manipulated by an army of self-serving insiders and snake oil salesmen,” he wrote in a Financial Times column. “Tesla’s Elon Musk and MicroStrategy’s Michael Saylor may be betting the house on bitcoin. That doesn’t mean you should.”
Can Bitcoin replace dollars?
As research on cryptocurrency continues, more nations are exploring the creation of central bank digital currencies, or CBDCs, essentially a government-backed, centralized digital version of fiat. China and Sweden are among those furthest along in their development of such digital money, and America is largely trailing its peers.
In February, Federal Reserve Chairman Jerome Powell said that the American public would be engaged on the issue starting later this year, and Treasury Secretary Yellen has been supportive of the idea.
Although discussions around CBDCs are evolving, Collins noted that many people already conduct their banking online and wholesale transactions between banks occur digitally as well. With payment products like PayPal, Venmo, Zelle and others growing, many people may not even notice the change to CBDC.
The advent of a central digital currency would not likely spell the end of cryptocurrencies like Bitcoin though. Lee and Collins agree that the biggest potential for cryptocurrency comes from the idea of decentralized finance, or banking done without the need for banks.
“There’s a parallel financial system being built around cryptocurrency that at some point could do everything that our current financial system does. And that’s huge,” Lee said.
Many cryptocurrency investors liken the future of Bitcoin to gold, a relatively stable, high-value asset that isn’t traded often. For now though, Lee likens Bitcoin to a “sandbox.”
“We’re letting the kids play in the sandbox so that they can make mistakes and grow. We’re sort of keeping it segregated from the rest of the world, so that we can put a fence around any of the accidents that happen,” he said.
While Bitcoin is the most-tracked cryptocurrency today, Lee said that other coins under development right now will likely one day become more important. Bitcoin’s architecture, which puts an emphasis on transparency and traceability via blockchain technology, is not well-suited for daily transactions, he said.
“For every transaction that’s made on a blockchain, another link is added to the chain. So for every stick of gum purchased, that system is going to have a phone book that goes with it for purchasing,” he said.
In order to be competitive with a Visa or MasterCard, a cryptocurrency will have to process 50,000 or 60,000 transactions per second, Lee said. Some cryptocurrencies under development may one day reach that threshold, “but they’re not ready for primetime yet.”
Both Collins and Lee agree that Bitcoin won’t be the final word on cryptocurrency, but rather the starting point.
“It’s not going to be the most useful cryptocurrency in five to 10 years, there’s going to be other things that are better and more exciting,” Lee said.